Another quarter in the books and I am pleased to say things seem a lot brighter today than they did when I posted my last update in late October. November was a great month, both for the returns of the portfolio and more importantly, the results of the underlying companies. I was afraid things were headed in the wrong direction after my first three holdings reported (Aehr, Enphase & Tesla), but the SaaS portion performed well. Let’s get into it!
My YTD results:
Jan: 8.6%
Feb: 10.2%
Mar: 13.0%
Apr: 5.0%
May: 30.2%
Jun: 34.8%
Jul: 47.1%
Aug: 35.6%
Sep: 30.3%
Oct: 17.6%
Nov: 39.7%
YTD: 42.4%
My current portfolio:
The Trade Desk: 17.2%
Crowdstrike: 15.9%
Datadog: 13.4%
Cloudflare: 9.1%
MercadoLibre: 9.1%
Snowflake: 7.8%
Axon: 6.7%
ELF: 5.6%
Nvidia: 3.7%
Celsius: 3.0%
Aehr: 2.9%
Telsa: 1.5%
Cash: 4.2%
I am going to revert back to my original theme of discussing each company following their earnings. I think I will change how I do my quarterly update depending on how active I am in the given quarter. This quarter saw fewer changes, only one new addition to the portfolio, so I will just discuss each holding.
Earnings Thoughts:
The Trade Desk:
Another steady-Eddie quarter for The Trade De… wait, shares are dropping 20% after hours?! What did I miss??
The Trade Desk reported what I thought was a good quarter, but the market had other ideas. It turns out, the powers that be were expecting a stronger Q4 guide from the company but I thought guidance was right in line with their historical performance and guides. I thought this was way overdone and gladly took the opportunity to add to my position at $54 a share in after hours trading. That turned out to be a prudent thing to do because the stock quickly recovered and is up 32% from that purchase.
As for the actual quarter, it was much of the same. Revenue accelerated to 25% YoY, adjusted EBITDA margin was back over 40%, and adjusted EPS grew 27% YoY following along with the revenue growth.
The Q4 guide does indicate that growth will likely drop to around 20-22% next quarter but that is fine with me. Like I said, this is what I anticipated all along. The Trade Desk is not my largest position because I expected a blow out Q4. This company is my largest holding because I expect it to compound revenue and earnings at a 20% clip for a very long time. If it can do that, it will reward shareholders handsomely. As far as I’m concerned, that thesis is still very much intact.
Crowdstrike:
Wow, look at Crowdstrike go! Shares are up a whopping 140% YTD and as a result, the allocation has grown from 8.5% at the start of the year to 16% today. I certainly did not think that kind of return was in the realm of possibility this year but you won’t find me complaining!
I thought this was Crowdstrike’s best quarter in some time. Net new ARR increased sequentially to 13.8%, revenue increased sequentially to 7.4% and looks poised to remain at that level next quarter, customer adoption continued to trend higher, and profitability continues to soar.
The company is already well on its way to achieving their new long term targets announced in September. They produced a record 22% non-GAAP operating margin and even posted their first ever positive GAAP operating income to boot. Meanwhile, adjusted EPS continues to expand rapidly. While revenue is only growing 35%, EPS continues to grow by closer to 100% YoY. Operating leverage is on full display.
With all that said, I actually trimmed a small portion of my position recently. After living through 2020-2022, I have learned that it is not such a bad idea to take a bit off the table when things get a bit overheated. Sure, the business performance has been quite strong this year, but I am not sure it warrants a 140% rise in the share price.
Shares are now trading at about 70x FCF which feels stretched to me. I am trying to become more cognizant of valuation and taking a strategy similar to the one Bear has been implementing by trading around positions. I have no intent to sell out of Crowdstrike but I will likely continue to trim if the price expands further. Multiple expansion can only go so far and the multiple has expanded greatly for CRWD this year.
A lot of the conversation should probably be around the question, what is the right valuation/multiple? I like to go back to Salesforce as a guide to what is fair for a strong SaaS business. Back in 2013, Salesforce was at a $3B run rate while growing 30% with 20% FCF margins. They traded around 35-50x FCF.
Contrast that with Crowdstrike who is at a $3.15B run rate while growing 35% with 30% FCF margins. Does that warrant a FCF multiple of nearly double that of Salesforce? I don’t know, but I would feel better if it was closer to 50x instead of 70x.
Anyways, it is a fantastic company that I fully intend to own for the long haul but may be taking some gains off the table following the monstrous run the shares have been on. I am curious to get others thoughts on this subject as well.
Datadog:
This was a make or break quarter for Datadog. Performance the first two quarters of the year were lackluster to say the least, and most folks around here understandably exited the position. I held on to my shares, in large part because I thought it was a bit oversold for this kind of quality and because I believed (and still believe) revenue had a good chance to accelerate in response to the AI boom. While the jury is still out on the AI impacts, there was plenty to like this quarter.
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Revenue growth of 7.5% QoQ, matching its fastest growth in several quarters
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RPO up 16% sequentially, its fastest growth in seven quarters
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A record Non-GAAP operating margin of 24%
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Adjusted EPS of $0.45, up 96% YoY
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A much more positive and upbeat earnings call, including comments such as these:
In Q3, we saw usage growth in existing customers improved compared to Q2… We are seeing signs that the cloud optimization activity from some of our customers may be moderating.
Overall, we continue to see the impact from optimization in our business, but we believe that the intensity and breadth of optimization we’ve experienced in recent quarters is moderating. Meanwhile, our new logo activity has remained robust.
It looks like we’ve hit an inflection point. It looks like there is a lot less overhang now in terms of what needs to be optimized or could be optimized by customers. It looks like optimization is less intense and less widespread across the customer base.
We had a very healthy start to Q4 in October. While it is too early in the quarter to know for sure what will happen in the next couple of months, the trends we see in early Q4 are stronger than they’ve been for the past year.
Add all this up and it led to a 30% jump in the share price. With this increase, shares are up nearly 60% YTD. Pretty good for a company that has been ‘struggling’ much of the year.
Like Crowdstrike, I was very pleased with the performance but trimmed a small portion of my position last week at $118. The valuation feels stretched as well with the stock trading at over 80x FCF. I will also continue to trim this one if the share price continues to rise.
Cloudflare:
Cloudflare has really tested my patience this year. I have been quite unhappy with their performance this year and much like Datadog, most posters on the board moved on from the company. Well, Cloudflare delivered a strong quarter just when investors needed it most. There were plenty of highlights to call out -
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Revenue growth of 8.8% QoQ, its fastest growth in four quarters
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7,898 new customers, the most in five quarters
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206 new $100K customers, the most in four quarters
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A record Non-GAAP operating margin of 13%
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DBNRR increasing by 1%, the first uptick in seven quarters
Much like the the two companies above, the market rewarded Cloudflare and shares have jumped from $55 to $78 following earnings. And as I did with CRWD and DDOG, I trimmed a bit of my position last week following the big run. Shares are up over 80% YTD even though the actual performance has been weaker for most the year.
Since Cloudflare is still early in its journey to producing significant FCF, it does not make much sense to value it against FCF like I do for CRWD or or DDOG. But just for arguments sake, if Cloudflare did have 30% FCF margins like CRWD, the stock would still be trading at over 70x FCF.
Reviewed another way, Cloudflare is trading at a higher P/S than all three of the businesses listed above. Cloudflare has seemed to always trade at a premium but I think the current valuation is pretty stretched for a business which is likely to grow under 30% next quarter. As another core holding of mind, I won’t exit the position but will continue to trim if the valuation expands.
MercadoLibre:
This company is incredible. Aside from Nvidia, no other company I own is coming close to matching this kind of performance. Essentially every metric is moving in the right direction and an astonishing speed too. It is remarkable, just look at these highlights -
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Revenue of $3.76B, up 40% YoY, accelerating from 31% last quarter
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Gross margin of 53%, up 3% sequentially
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Net income margin of 9.5%, up from 4.8% last year
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Diluted EPS of $7.16, up 180% YoY !!!
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TPV of $47.3B, up 47% YoY
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2,508M total payment transactions, up 74% YoY
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GMV of $11.4B, up 32% YoY
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120M unique active users, up 36% YoY
I could keep going, but you get the point. The FX neutral figures are even more impressive. This company is executing at an extremely high level and it has quickly grown into one of my larger holdings.
I wrote the following in my last update - “I think the shares could see some positive momentum now that they have firmly flipped the profitability switch.” This very much turned out to be the case as the stock has pretty much been on a tear since the very next day and is now up 95% YTD. However, unlike the names above, this valuation is still reasonable and I have no intentions of trimming. I am surprised this name does not get more recognition on the board.
Snowflake:
Hey, we finally got a normal FY guidance increase from Snowflake! Of course, it came in Q3 when there is only one quarter left in the year but better late than never 
I certainly wouldn’t call this a blow out quarter by any means. I think the market, and myself, was just relieved that it wasn’t a bad quarter. There were some good things to call out such as the fastest sequential revenue growth in several quarters, a record Non-GAAP operating margin of 10%, and strong expansion of Snowpark and stable edges across the customer base. The call was also more positive than the previous few and included comments such as the one below.
The exposure to these drastic resets and optimizations that we saw earlier in the year is getting less and less with each incremental quarter. Secondly, people have really driven themselves through these processes and rationalized themselves and are now in a good place to move forward. You can only optimize and rationalize so much at some point.
But on the flip side, there were a handful of weaker metrics as well such as low customer growth, virtually no addition of G2K customers, continued deceleration of NRR, and a softer Q4 guide than I would have liked.
Ultimately, the market essentially shrugged and the stock was pretty flat following earnings. I would call this a win considering the stock is up 22% over the last month and now 42% YTD. Again, I am not sure how much of this is deserved. It seems the market is beginning to believe that stabilization, or possibly reacceleration, is here or coming in 2024.
I have not made any changes recently to this allocation but I expect to trim the position if shares continue to rise. With a P/S of 27 and a FCF multiple of 100x, there is little margin for error as usual with Snowflake.
Axon:
Another great quarter is in the books for Axon. Revenue continues to chug along at the mid to low 30’s while profitability continues to expand. ARR is now growing 54% YoY, which indicates that revenue remain durable for the foreseeable future. The cloud portion of the business is now at a $600M run rate and growing steadily north of 50%.
Meanwhile, the hardware side of things is going quite well in tandem. The new Taser 10 is being met with enthusiasm and projects to have a solid runway of growth ahead. As the company continues to expand into new markets such as international and enterprise, they should be able to grow this side of this business durably as well.
I am not sure if this is a good metaphor but I view Axon as the grandpa of the portfolio. While it has a smaller market cap than most my holdings, it feels like the older, wiser, steadier company. I am also a big fan of the mission of this company. Full steam ahead on the Axon train!
ELF:
ELF reported in early November and it was another strong quarter. Revenue is growing 76%, margins are expanding, guidance is being raised, what’s not to like?? Well, much to my surprise, the market shrugged off the report. After the stock was cut from $130 to $90 prior to earnings, I figured the stock would rip after this report but nope.
I took advantage of the lull and added to my position around $95 but am wishing I added more as the stock finally got the memo in mid-November and is up 32% over the last month.
The valuation is still quite reasonable with a forward PE of ~50. For a company growing over 70%, that feels about right. I don’t plan to add to my position unless we see shares under $100 again as I am still getting to know this company. I move slower than a lot of others who post updates here.
Nvidia:
Another absolutely blow out quarter for Nvidia but that has become the norm for this company. Much like ELF, shares were mostly flat following the earnings report. I suspect most would argue that is because this kind of beat and raise was priced in, but I am wondering, is that accurate?
The forward PE is currently around 30, which feels absurdly cheap for a company putting up this kind of performance. My assumption is the market believes this won’t last and we are just in the mega boom portion of the semiconductor boom and bust cycle.
Based off everything I am reading about AI, I don’t think that is accurate. I believe Nvidia will be able to keep growing revenue and earnings at a high rate for at least the next 1-2 years. If this turns out to be true, then shares are extremely undervalued right now.
I added a bit to my position following earnings and plan to increase this to at least a 5% holding. To be honest, the biggest thing holding me back is the fact that it feels so undervalued. I am asking myself, what am I missing? How can a company growing at this rate with this kind of profitability and moat be trading at 30x fwd earnings? It feels too good to be true, like the market knows something I don’t (like revenue is going to drop off a cliff). I suppose time will tell, but my money is quite literally on Nvidia.
Celsius:
This is my only new position since my October write up. Since I am so new to the name, I won’t add much here other than to say that I am surprised this also has been trending downward following its last earnings report. I have taken advantage to add to my position around $50 a share. The rapid revenue growth, expanding profitability, and potential of international growth all shape up to make this out to be a promising investment. I plan to continue adding to this position while shares trade around $50.
To be honest, the biggest thing holding me back from investing earlier was price anchoring. I sold out of Celsius in February 2022 for $60 ($20 split adjusted). I don’t anticipate shares falling to that price but I was simply being stubborn about it. But now I am finally back in and hoping to hold on longer this go round!
Aehr:
I also don’t have much to add here. I think the shares were oversold following the previous earnings report and decided to give them one more quarter to see what happens. With a PE of 44, there is significant upside if they can execute. I don’t think I will hold onto this company long term but at these prices, I think it is worth one more spin of the wheel.
Tesla:
Interest rates are clearly having an impact on Tesla’s sales but I am certain there are about 1000 articles you can find that will give a much more detailed analysis of the quarter and prospects than I would provide. However, I do think the cybertruck will be a big boon for Tesla. There has never been a car like that produced since I have been alive and it is going to draw attention everywhere. This kind of innovation is exactly why I am holding onto to Tesla. I plan to keep the position smaller but there is just way too much going for this company for me not to own it. I do believe Tesla has the potential to be the largest company in the world some day and I want to be along for the ride. We will see where it goes!
Sold:
Bill & Enphase:
As I wrote in my October update, I was planning to exit Enphase after their disaster report. Luckily, I sold out around $100 rather than the $75 it traded at following earnings. I have no clue why shares are up 32% over the last month considering how awful that report was but I was happy to take advantage of it.
Bill was a painful ride. I first bought Bill in February 2022 (likely with the proceeds from selling Celsius, what a doofus I am), and it pretty much went straight down from then on. The Q1 report was awful. Thankfully I cut the position in half prior to earnings but I did not see this coming. The FY guide was cut, indicating that growth is likely soon to fall below 10%. That was all I needed to see to run for the exits. While the turn towards profitability has been impressive, that can’t save the stock when revenue growth is falling off a cliff.
My biggest lesson from Bill is to be more cautious of businesses utilizing M&A as a growth strategy. For starters, it made analyzing the business significantly more difficult but more importantly, I have come to view this as a very challenging way to build and grow a business long term. A couple others that come to mind having tried this strategy are Twilio and Okta, and neither of those are doing so hot either.
Like the vast majority of other positions of sold out of, I should have exited this stock sooner. Once I start trimming a position due to deteriorating fundamentals, it generally means I should exit altogether. Knowing when to sell a company remains my biggest challenge. I tend to hold on too long. I made the same mistake with SentinelOne, Sea, Peloton, Roku, Upstart and Zoom. When in doubt, get out! Maybe one day I will learn not to give such a long leash…
Part of me feels like I am selling low and buying high as I have moved money from SentinelOne, Bill and Enphase to companies like ELF, Celsius and Nvidia. But at the same time, I am a big believer that you have to pull your weeds and water your flowers. I think it makes more sense to be invested in the best companies and if it means I have to sell my losers at a loss to invest in winners who have appreciated, then so be it. Winners tend to keep winning and there will inevitably be some losers along the way.
Watch List:
- MDB - They reported another strong quarter. I have been very impressed with their performance this year but I can’t get myself to buy at these prices. The valuation is too rich for my blood at their growth rate but I do see this as a company who is likely to have durable growth.
- SHOP - Much like MDB, I view this as another long-term compounder. The valuation is keeping me out of this name but I think Shopify is going to grow strongly for years to come and own it in other accounts.
- IOT - Congrats to all the shareholders here on this one! That was an impressive earnings report and shares rightfully rebounded. I came close to buying it at $23 but ultimately passed in favor of other opportunities. I just can’t buy in to the idea of durability for Samsara but am starting to come around to it following strong earnings results like these.
Concluding Thoughts:
Well that was a refreshing November. Unfortunately, it doesn’t feel like all of it was warranted as the overall business performance was good, but not great. I don’t think I am alone with this feeling seeing as many people who post portfolio updates on the board raised a good bit of cash recently. I am following a somewhat similar path with my recent trimming of CRWD, DDOG and NET based off valuation.
Ultimately, the market is forward looking and based off the past month, it appears to be signaling hope that greener pastures are ahead. I have no idea if that will turn out to be the case or not so I just intend to own the best companies I can find, and at the right price. This is the first year I have ever trimmed multiple positions due to stretched valuations so I am trying something new in the aftermath of the past couple years. We’ll see whether that turns out to be wise or not.
Thankfully, the overall feeling coming out of the Q3 reports is that things are getting better. That alone is promising. Let’s hope that turns out to be true.
Wishing you all a Merry Christmas and happy New Year.
Rex
Q3 2021: https://discussion.fool.com/majorfool39s-earnings-thoughts-34977…
Q4 2021: https://discussion.fool.com/majorfool39s-q4-earnings-thoughts-35…
Q1 2022: https://discussion.fool.com/majorfool39s-q1-earnings-thoughts-po…
Q2 2022: MajorFool’s Q2 Earnings Thoughts & Portfolio
Q3 2022: MajorFool’s Q3 Earnings Thoughts & Portfolio
Q4 2022: MajorFool’s Q4 Earnings Thoughts & Portfolio
Q1 2023: MajorFool’s Q1 Portfolio Update
Q2 2023: MajorFool’s Q2 Portfolio Update
